Real estate crowdfunding is a great way for small investors to invest in big real estate projects.
Real estate can be an excellent investment and source of income and diversification. Unfortunately, buying entire properties can be expensive, difficult and risky for many individual investors. Real estate crowdfunding has become an increasingly popular solution to those problems for investors looking for an easy way to diversify into real estate.
Even investors with limited experience and small budgets can use real estate crowdfunding to pool their money with other investors online to purchase properties or shares of properties together. Real estate crowdfunding may be a great way to build or grow your wealth over time, but it’s important to understand how it works and which platforms provide the best opportunities.
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Understanding the Real Estate Crowdfunding Process
Crowdfunding is a fundraising method that allows people or businesses to raise money directly from a large group of investors online. Equity crowdfunding involves private businesses raising capital from investors to fund operations. In return, these investors receive equity ownership of the businesses.
Real estate crowdfunding allows investors with as little as a few hundred dollars to pool their money and fund real estate investments to eventually earn a profit from those assets. Typically, crowdfunded real estate investments are paid to a real estate investment trust, or REIT, a holding company that owns and operates the properties. Many REITs are public companies and have stocks that trade on major U.S. exchanges. However, real estate crowdfunding investors can fund private REITs that may offer higher returns than their public counterparts.
Some private REITs are only accessible to accredited investors – people who meet specific requirements related to wealth and investing experience and who qualify for more advanced investments that are not available to the general public.
Once an investor chooses a real estate crowdfunding platform, they simply open an account, fund it and begin constructing their personalized real estate portfolio. Here are five leading real estate crowdfunding platforms to consider.
Best Real Estate Crowdfunding Platforms for Investing
CrowdStreet is a Texas-based company founded in 2013 that has funded 798 real estate deals worth a combined $4.2 billion, and investors have cashed out of 168 of those deals. According to CrowdStreet, the platform’s users have generated a 17.9% realized internal rate of return, or IRR, the annualized return based on assets that have been sold.
CrowdStreet has a user-friendly platform, high-quality offerings and has completed deals involving 17 different property types across 45 U.S. states, providing investors plenty of opportunities to find deals they like. Unfortunately, the platform is only available to accredited investors, and most deals have a $25,000 investment minimum.
RealtyMogul is an excellent real estate crowdfunding option for both accredited and non-accredited investors who want to invest in commercial real estate assets. RealtyMogul has financed more than $7 billion in property value via its platform over its 10 years in the business. The company has a registered membership base of more than 280,000 users and has collectively financed more than 32,000 apartment units.
RealtyMogul offers access to both public, non-traded REITs and private placements. The platform’s lowest investment minimum is $5,000. RealtyMogul has 227 total realized investments and has generated a 20.6% overall realized IRR.
While technically a private equity firm, as it raises capital for its various funds on an ongoing basis, Fundrise offers a much lower point of entry than traditional private equity. Fundrise is one of the 50 largest real estate private equity investors in the world based on its more than $1 billion in annual capital deployment in 2021 and 2022. The company’s asset portfolio includes more than 20,000 well-located residential units and industrial assets focused on e-commerce. The company’s real estate portfolio is valued at more than $7 billion and includes 292 active projects and 147 completed projects. Fundrise’s clients have generated an average return of 31.4% after three years and 68.6% after eight years. The platform is open to all investors, and it has minimum investments ranging from $10 for a starter portfolio and up to $100,000 for a premium account.
SEE: 7 Best REIT ETFs to Buy
First National Realty Partners
First National Realty Partners is an easy-to-use platform for accredited real estate crowdfunding investors that was founded in 2015. The company offers a one-hour live webinar for investors prior to each real estate deal that includes an overview of financial targets, an asset management plan and the property’s market and demographics. First National has more than $2 billion in assets under management and more than 60 current assets held. The company has more than 2,600 investors and has made more than $100 million in investor disbursements since its inception. First National has a relatively steep $50,000 minimum investment per project.
EquityMultiple is a real estate crowdfunding platform founded in 2015 that focuses on institutional commercial real estate investments for accredited investors. EquityMultiple has more than 47,000 investors and has made more than $379 million in total investor distributions. The company has participated in more than $3 billion in commercial real estate transactions, and the platform has a minimum investment of just $5,000. Its yield-oriented real estate investments have preferred equity target returns of between 7% and 12% annually. The company also offers diversified notes as yield-oriented cash management investments.
Recommendations for Potential Investors
Real estate crowdfunding can be a lucrative opportunity for certain investors, but it may not be the right fit for everyone. Before jumping into real estate crowdfunding, here are several factors to understand and consider:
Portfolio diversification. Real estate can provide an excellent means of diversifying your existing portfolio of stocks and bonds. Diversification can help reduce the risk that one single bad investment or asset type will drag down your overall returns.
Equity versus debt. Before making a real estate crowdfunding investment, understand the difference between equity investments and debt investments. Equity investing is the most common form of real estate crowdfunding investment, and it involves taking an equity, or ownership, stake in a property. Debt investments are typically lower-risk alternatives that essentially involve making loans to property owners that pay investors interest.
Geography. Carefully consider the geography and demographics of any real estate crowdfunding investment. Some businesses and property types may perform well in one area and poorly in others.
Liquidity. Private real estate investments can be extremely illiquid, meaning these investments can be difficult to sell quickly at market value. If there’s a possibility you may need access to your cash in the event of an emergency, real estate crowdfunding may not be the best investing approach for you.
Fees. Different real estate crowdfunding platforms will charge different fees, and those fees may even vary from deal to deal. Fees can eat into investment returns over time, so make sure you understand the fee structure of any deal before buying in.
Source: US News